The Crazy Opportunity: Series I

A close look at Nigerian securities show that a once in a lifetime opportunity is right before us but fear has paralyzed us from taking advantage of it or maybe we have not paid a close enough attention. 


I have watched the performance of the Nigerian Eurobond very closely since it was issued and, I must say, the performance has been quite impressive. The bond price dropped precipitously a few weeks before the devaluation, at the time when the CBN spent about $1 billion of the foreign reserves on a weekly basis just to keep the Naira at N150 to the US dollar. The bond recovered almost immediately after the devaluation of the local currency and liquidity tightening measures were put in place. 


See the chart pulled from Bloomberg below.

It is quite interesting to note that the Nigerian bond rated B+ by S&P sells at a yield of about 5.7%, which is exactly the same as that of Italian bond with the same maturity that is rated BBB+. In fact the yields on the Italian bonds topped 7% between November and December 2011. There are exactly six notches separating Nigeria and Italy according to the S&P rating. This implicitly means that the market believes that the Nigerian economy is as strong as the Italian economy, if not stronger.


The chart also shows that the market does not seem to care about the incessant bombs in the Northern parts of the country and it showed very little reaction to the protests that brought Nigeria to a standstill at the beginning of the year because of the fuel subsidy withdrawal.


Another striking thing is the fact that a Federal Government of Nigeria (FGN) bond with the same maturity as the Nigeria Eurobond has a yield of 16.5% according to the yield curve. That does not make any sense. It is either the Nigeria Eurobond is seriously overpriced or FGN bonds are dirt cheap or a combination of both. I believe in the latter because, believe it or not, despite all the high unemployment figures, the Nigerian economy is stable and growing. A budget deficit kept to within 4% of GDP and total debt of just 25% of GDP is something Italy, Greece, Spain and even the US would die for. It is, therefore, quite strange that the dollar denominated bond that Nigeria has to work for, by generating revenues through the sales of oil and taxes, to service the coupon and principal payment has a far lower yield than that of the bond that the Nigerian Government can simply sit back, relax and print money to pay. The difference is even higher than 1,000 basis points!


Something is quite glaring: Foreign investors believe in Nigeria more than we do! This is evidenced by the performance of the Eurobond and the fact that foreign direct investment increased by 11% in 2011, at a time when the global economy was writhing under the burden of sovereign debt crises, a near default in the US and many pundits were predicting a double-dip recession. Not even the drop in demand for imports in China by 15% could dent the confidence imposed on Nigeria.


The explanation here is that the liquidity tightening measures put in place by the CBN to fight inflation, stabilize the local currency and make interest rates prohibitive for Government in order to establish fiscal discipline has led to this situation. This has inadvertently created an opportunity of a lifetime that is likely to cause a massive wealth transfer in the coming years.


This topic will be completed tomorrow.